In 2008, the Malta Financial Services Authority, Malta’s sole regulator of financial services, was the first EU regulator to issue guidelines on Islamic finance, which were updated in 2015-2016. It also issued a ‘Guidance note for Shari’ah compliant funds’ in 2010, which established how the legal and regulatory framework established under the Investment Services Act would apply to Shari’ah-compliant funds in Malta.
In 2016, the Malta Stock Exchange launched an Islamic Equity Index in order to attract investment and business from the Middle East. This move pre-empts the government considering the issuing of Islamic Bonds (Sukuk).
Malta’s sterling reputation as a financial services centre, its positive relations with the Arab world, and its robust regulatory framework, paired with its strategic location, are some of the reasons why Islamic institutions consider Malta as an ideal platform for business. Thus, we can expect to see further growth of the Islamic finance industry in Malta.
From a legislative aspect, Malta is already well-geared to welcome new structures that provide for Islamic finance. Malta is the only EU member country whose regulatory framework provides for protected cell companies, and furthermore it also provides for incorporated cell companies. Thus it may easily accommodate charitable collective funds, also known as Takaful insurance solutions.
Sharia is based on the principle of fairness
When investing in Malta, Islamic investors are given the opportunity to set up their funds as Special Purpose Vehicles, Undertakings for Collective Investment in Transferable Securities, Alternative Investment Funds or Professional Investor Funds. Islamic Investors who are interested in listing in Malta can also do so since the Malta Stock Exchange has certified the stocks of a number of listed companies whose activities are sharia-compliant.
Thus, Islamic finance institutions may also generate funds by listing on the Malta Stock Exchange. In fact, a number of companies have already taken advantage of this opportunity, particularly SMEs, which can now list on the newest list ‘Prospects’, that is specifically catered to smaller enterprises.
With the legislative structure already in place, the next step towards consolidating Malta as a hub for Islamic finance will be to issue a Sukuk, thus permanently placing Malta on the map of Islamic finance. Issuing a Sukuk would also complement the highly successful Citizenship by Investment Programme as a possible investment option.
The Islamic finance sector is growing steadily every year and it is estimated that by 2017, global Islamic finance investments will surpass $ 2.6 trillion.
Islamic finance is regulated by Sharia law, which governs all economic and social activities and undertakings. Under Sharia law, people are encouraged to use their money in ventures that are in line with the principles of Islamic law (Halal investments), thus treating money as a means of exchange rather than a commodity for speculation. Gharar, meaning any uncertainty, risk or speculation, is prohibited as Sharia is based on the principle of fairness and requires that all parties have perfect knowledge of the transactions they are entering.
The taking or giving of interest (riba) is prohibited, irrespective of the purpose for which the loan is made. To remedy this, modern Islamic practice has replaced interest with cash flows from productive sources such as joint ventures and profit sharing arrangements, and income from the provision of services such as wealth management, investment advice, spot foreign exchange transactions and fund transfers. Islamic finance also embraces the principle of profit sharing and equity participation.
Nicholas Warren is a senior manager in the Financial Services Practice Group at Chetcuti Cauchi Advocates.
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